Picture this: You're a homeowner of a certain age. Most of your net worth lies in the value of that home, and you're feeling cash-strapped. Maybe you don’t have enough income to meet your expenses. Or maybe you just need some extra money to make your retirement more enjoyable. Should you consider that tempting offer to "convert your home to cash!" (as the omnipresent ads say) with a reverse mortgage?
A reverse mortgage is a type of loan, and as with any financing, banks expect borrowers to meet certain qualifications. This article will give you an idea of whether it’s worth your time to apply for a reverse mortgage. Since 95% of reverse mortgages issued are Home Equity Conversion Mortgages (HECMs), we'll focus on those. Proprietary reverse mortgages and single-purpose reverse mortgages may have different requirements (see What are the different types of reverse mortgages?).
A homeowner must be at least 62 years old to qualify for a reverse mortgage. Why? Because the federal government says so. Your age also determines how much you can borrow: Generally, the younger you are, the less you’ll get; the older you are, the more you’ll get. Even if they qualify, some applicants may be too young for a reverse mortgage to be a decent source of funds.
Your Ownership Status
The next requirement is that you either own your home free and clear or have a small remaining mortgage balance – "small balance" being defined as one that can be paid off with the reverse mortgage proceeds. You also have to hold title to the home and live in it as your principal residence.
You can’t get a reverse mortgage on a rental home, a vacation home or even a home that used to be your primary residence but has been unoccupied for a year (because you’ve been living in a nursing home, for example). The home usually has to be a single-unit dwelling, with the exception of a two-to-four–unit property, in which you live in one unit and rent out the others. If your home is a condominium, you can get a reverse mortgage on it if it’s on the Department of Housing and Urban Development (HUD)’s approved condominium complex list (click here to check).
Your home also must be in good repair; if it isn’t, you may still be able to get a reverse mortgage conditional upon using some of the proceeds to make required repairs. HECMs are insured by the Federal Housing Administration, and it has minimum property standards for the loans it guarantees.
Since you aren’t making payments on a reverse mortgage, but rather receiving payments, you don’t necessarily need any income to qualify for this loan. While the mortgage will have origination fees and closing costs, you can roll these into the loan if you don’t want (or can’t afford) to pay for them up front and out-of-pocket.
That being said, you’re not entirely off the hook when it comes to financial qualifications. One of the conditions of getting a reverse mortgage is that you must continue to maintain your home and pay homeowners insurance premiums and property taxes. If you don’t do these things, the lender’s collateral – that is, your house – is at risk. The lender will perform a financial assessment when underwriting your reverse mortgage, and if you don’t have enough income or liquid assets, the lender might set aside part of your reverse-mortgage proceeds to cover taxes and insurance.
Because HECMs are federally insured, you can’t get one if you owe the government money. If you are long overdue on paying your income taxes, a Small Business Administration loan or federal student loans, you’ll need to get current before you can qualify for a reverse mortgage. Lenders will be able to tell if you’re delinquent from your credit report.
The Counseling Requirement
Before you can get a reverse mortgage, you’re required by the federal government to go through mortgage counseling.
Reverse mortgage housing counselors work for independent, government-approved housing counseling agencies, and their job is to explain the costs and consequences of taking out an HECM and the various ways you can receive the proceeds. They will also help you explore other options for making ends meet, such as getting public assistance to pay for your food, utilities and medications. The Federal Trade Commission says you can expect to pay around $125 for mortgage counseling. If you can’t afford it, that doesn’t mean you can’t get a reverse mortgage, but you will need to find a reverse mortgage counselor who waives the fee.
Mortgage counseling is designed to protect those who aren’t financially savvy and need extra help understanding what they’re getting into. If you already fully comprehend how reverse mortgages work, this step is probably going to feel like a waste of time and money; just find the least expensive, most convenient option – phone consultations are available in most states – and get it over with. Because reverse mortgages can be complicated and expensive, it never hurts to run through the details one more time or pose some last-minute questions.
The Younger Spouse Problem
Because reverse mortgage borrowers must be at least 62 years old, in the past some married couples made only one spouse an official borrower on the reverse mortgage contract. The goal was to increase the reverse mortgage proceeds because older borrowers get more money. That decision had unintended consequences: If the borrowing spouse died first, the reverse mortgage came due, and the surviving spouse would lose the home unless he or she could repay the reverse mortgage. (HUD now has a procedure that often can avoid that problem.)
If you take out a reverse mortgage today, the lender must include both you and your spouse on the contract even if one of you isn’t yet 62 years old, thanks to 2014 HUD rules following a 2013 court ruling. If one spouse is not yet 62, he or she still will not be a borrower. However, these new rules set up a deferral period that prevents a widow or widower from potentially losing the home. Unfortunately, the new rules also mean that loan proceeds now have to be based on the younger spouse’s age.
Also, what HUD calls a "non-borrowing spouse" may not receive any more proceeds from the reverse mortgage after his or her spouse's death – a problem if the proceeds were not obtained as a lump sum, but rather as monthly payments or a home equity line of credit. This payments issue should be thought through carefully whenever a non-borrowing spouse is about to be involved in a reverse mortgage.
The Bottom Line
It’s generally easier to qualify for a reverse mortgage than to qualify for a regular, forward mortgage. Your credit score isn’t a factor, and you only need enough income or assets to continue paying for homeowners insurance, property taxes and home maintenance. You must be at least 62 and include your spouse on the loan, which you’d want to do anyway so he or she isn't foreclosed on when you die.
If you think a reverse mortgage might be right for you, the next step is to find a lender. See Find The Top Reverse Mortgage Companies.